Human Capital Policy and Inequality: 4 of 5

This entry covers the last part of policy interventions that Professors Carneiro and Heckman discuss in their paper, “Human Capital Policy” for the “Inequality in America” debate.

Carneiro and Heckman suggest that private training works and has high returns but their invoked caveats quickly tarnish an otherwise optimistic painting. In brief, not everyone gets trained. First, training programs are self-selecting as workers from higher socio-economic strata or with better education choose to participate, while others either forego these opportunities or are not invested-in as heavily. Due to bias participation rates, private training often exacerbates existing inequalities. Oppositely, the professors are not too fond of public training programs and specifically counter Alan Krueger’s example of the Job-Corps as a successful intervention. Krueger’s optimistic results accrue because of his underlying assumptions that omit critical elements, such as that “there is no empirical support for the assumption that benefits of program participation last indefinitely, and no social-welfare cost of taxation is used to adjust costs in the main Job-Corps report.” Once one factors these in, benefits become negative. Moreover, even discounting the invalid assumptions, the conclusions are statistically insignificant, amounting to $624 of added income over 4 years. “The evidence summarized…indicates that the rate of return to most U.S. and European training programs is far below 10%, although the benefits to certain groups may be substantial, and some [segments] may pass cost-benefit tests.”(p. 194) Overall, they conclude that “We cannot look to public job training to remedy or alleviate substantially skill deficits that arise at early ages.”(p. 194)

Next, Heckman and Carneiro discuss policies enacted through subsidies and taxes. They illuminate the fact that the tax code at the current juncture promotes “certain types of investment” that include fostering a preference for cheaper (and thus lower quality) tertiary education and that it benefits individuals of higher-skill. They offer to move to a flat tax on consumption which would generally raise wages but would not have much impact on human capital. Interestingly, they do not consider less radical moves, such as eliminating the itemizable deductions that skew incentives to begin with. In the end, they conclude that the tax code exacerbates inequality in human capital but that it is a not realistic tool for addressing income inequality.

Under the assumption that current income and education inequality was caused by a shift in the economy to a more skill-biased paradigm, Heckman and Carneiro explore ways of rectifying obsolete skills. One of the possible remedies is to retrain workers. They argue that younger workers can have their skills be effectively updated, thereby allowing them to re-intergrade into the economy and enjoy its fruit. This does not apply to older cohorts, though, who even when offered subsidized opportunities to retrain, either refuse or fail to benefit substantially. As a result, it is inefficient to retrain them, making it more efficient “to invest more in the highly skilled, tax them, and then redistribute the tax revenues to the poor.” If this proves unfavorable with voters, they suggest job-subsidies for the losers in the economic change. Interestingly, they do not delve into details, such as programs used abroad or differences in programs that aim to retrain workers, causing this section to feel unfulfilling.

Finally, the team addresses the inflow of human capital from immigration (outflow not being a concern). They agree with Professor Borjas that stemming the flow of low-skilled immigrants would help the US increase its human capital. Data suggest that “50 percent of all measured high school dropouts have been immigrants,”(p. 203) which, among other statistics, implies that an inflow of low-skilled immigrants dampens human capital statistics. By reducing their flow or even restricting to only high-skilled immigrants, America’s average human capital would improve. Interestingly, amid the thorough and evidence-heavy assessments that pervade the rest of their paper, this subsection comes of very shortsighted. Similar to statements that suggest that immigrants take away native-born jobs, this analysis accommodates only a single channel through which immigration can function. Existing empirical evidence shows that immigrants either have no impact on native-born wages or raise them. Akin to this complementary interpretation, it does not seem unfeasible that immigrants, or at least certain immigrants, actually raise the human capital of native-born citizens.

This concludes my discourse of Professor Carneiro and Heckman’s paper on Human Capital. In the following entry, I will address remarks made by peers that enhance and improve on the arguments and perspectives offered in Kruegman’s and Heckman’s papers.